Credit rating reduction hamstrings DVI

Fitch cites weak biz performance, keeps outlook negative

By

MichaelBaron

NEW YORK (CBS.MW) - Shares of DVI Inc. plummeted on Wednesday after credit agency Fitch lowered its senior unsecured rating on $155 million worth of the company's debt due in 2004.

After having its stock halted for news pending for more than two hours in the middle of the session, DVI issued a press release saying it would release its financial results on Friday, and that it expects an after-tax loss of $6.5 million to $7.5 million for the fourth quarter, yielding a net loss of $3.4 million to $4.4 million for the year.

These results reflect charges totaling about $5.6 million related to "de-emphasized" business activities and the valuation of real estate owned and of operations related to healthcare companies that it holds an interest in. DVI expects that, after giving effect to these results, its book value will stand at around $15.50 per share as of June 30.

Fitch's move prompted U.S. Bancorp Piper Jaffray to drop its rating on shares of the Jamison, Pa., provider of specialty financial services for the healthcare industry to "market perform" from "outperform" and to slash its price target to $10 from $22.

After plumbing a 52-week low of 4.60 earlier in the session, the shares
DVI, +0.00%
rebounded following its press release to close down $2.40, or 28.6 percent, at $6. Volume totaled 800,000, dwarfing the issue's daily average of 21,800.

Fitch, which left its ratings outlook on DVI negative, dropped its rating to 'B+' from 'BB-'. It said that move reflects "DVI's weak operating performance, asset growth exceeding internal capital formation, a rise in encumbered assets as a percentage of total assets, and increased financial leverage."

The agency believes DVI faces "significant challenges" in reversing these trends in leverage and capitalization, and that, should the trends continue, "the cushion available to unsecured debt holders may become further compromised."

For its part, Piper Jaffray said that it's concerned about earnings quality and quantity trends at DVI as well the potential for liquidity issues in the wake of the Fitch downgrade.

The firm said that the trends at DVI have been particularly disappointing because the company focuses on one of the bright spots in the U.S. economy - the health care sector.

DVI's press release confirmed Piper Jaffray's suspicions that the company could record additional charges such as those it logged in the third quarter, when results were reduced by a $10.8 million write-down of its investment in Corvis
CORV
and a $5 million provision related to its Argentina operations.

These charges swung DVI to a loss of $9.2 million, or 64 cents a share, for the three months ended March 31 from a profit of $6.5 million, or 42 cents a share.

But its contention that per-share book value will come in at $15.50 was better than Piper Jaffray's estimate of $15.

There was no per-share breakdown of DVI's outlook, nor did the company provide a clean number that excluded the charges.

In its note, Piper Jaffray said it sees risk to its estimate for the quarter for a profit of 43 cents a share. The firm also lowered its projection for DVI for fiscal 2003 to a profit of $1.25 per share from $1.82, but it said that this is "admittedly a best guess, at the current moment."

The solution, according to Piper Jaffray, is for DVI to focus on its core domestic health care businesses "as we believe that would raise investor confidence, earnings quality, and the probability of long-term success."

The firm ends its note with a word of caution.

"Continuation of difficult earnings trends could put pressure on its (DVI's) stock price and could eventually negatively affect the cost of its funding sources," it told clients.

"DVI continues to spend significant time on the growth of its international businesses and we believe that has continued to be a low return business that adds risk and complexity to the company's business model."

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